and debt crisis. we can't go back in this district to a representative who has extreme liberal values, who is disconnected from the district like dan maffei was in his two years in congress. i've been honored by being representative from this district. respectfully ask for the listeners vote for november 6 so that i can continue to be the voice for upstate new york and washington. t.j. maxx for this opportunity. >> moderator: we want to thank the candidates for the time and willingness to share ideas. we also want to thank you for watching this election 2012 debate. goodnight.

the action on a stock frank. chairman schapiro said the libel make markets more transparent, stable and efficient. from george washington university law school, and this is 45 minutes. >> good morning. i am paul berman, 19 of the law school as art said and i want to welcome you to this conference and obviously welcome mary schapiro, chairman of the securities and exchange commission. so one of the things that i think makes this law school, the george washington university law school distinctive and different from other top law schools is the degree to which we are integrated into the real world of law and policy practice in this country. so one of the things we are always striving to do this not be an ivory tower academic institution solely, but also one

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that is always trying to engage the practicing bar, people from corporations, people who are not lawyers in the educational enterprise and also when public policy discussions. obviously we have a great advantage in being in washington d.c. and having so much access to the world of policy. but in addition, it's not just the location. it has to be your orientation as a law school. so it is something that i've emphasized since i've arrived, but long predates me, that this school wants to always be the place to convene public policy discussions, to create a forum for actionable information, to create an opportunity for nonpartisan and bipartisan discussion. as i like to stay in d.c., but

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outside the glare of d.c., not on a congressional hearing room floor, not a formal interagency process, but in academic and touche in, where important policy discussions can be had and maybe we can move the ball forward on important issues of thought leadership. in that regard, we are thrilled to be able to host this conference. and this is part of a series of conferences we have held over the last few years on the important regulatory reforms of dodd-frank and to welcome back to the law school, mary schapiro. merry is not only graduate of the law school, but has been a great friend of the law school for many years. she is spoken here on numerous occasions that we are always thrilled to have the opportunity to welcome her.

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and i'm really grateful that she has figured out a way to fit this into her unbelievably busy schedule so that she can be here to speak and give us her views up to the minute news from the sec. so please join me in welcoming mary schapiro. [applause] >> good morning, everyone. thank you for the kind introduction and effect for your wonderful stewardship and leadership of my alma mater. it's always wonderful to be back at gw. i also want to thank day symposium. it's an important to contribute to the debate and discussion around financial regulatory reform. four years ago this month, this

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nation was suffering from a near collapse of our financial system. while there are differences of opinion as to what was the most significant trigger, a bipartisan senate committee report known as the levin coburn report asserted the crisis was a result of high risk, complex financial products, interest in the failure of regulators, credit rating these in the market itself to rein in the excesses of wall street. while the spirit of our history will be read and then reread it over and over again, congress and the administration knew that the status quo was unacceptable. so together they passed landmark legislation to address many issues highlighted during that tumultuous period. the dodd-frank ulster reform act is a vital and comprehensive response to the financial crisis, an event that devastated the american economy, cost the

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american people trying to dollars and millions of jobs and undermine the confidence in our financial system requires if it is to drive and support a growing economy. the sweeping scope of this financial reform legislation sometimes it secures the fact that despite its breath, and is rooted in the handful of sound principles that should have been more firmly in place before the crisis in his embrace serves to make markets more stable and efficient. simple principles, like markets should be transparent, regulation should be consistent without gaps that can be exploited by those who wish to indulge in risky, destabilizing or even illegal behavior. market participants, not taxpayer should read the risk market activities and regulator should have willingness in both the need to apply these principles to the day-to-day workings of the financial

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markets. the dodd-frank actress at a principles into the foundation for effective regulation. interestingly, the title of the historic legislation seems to suggest there were two parts of the bill, wall street reform on one hand and consumer protection on the other. get a closer examination of the log reveals that both portions are rooted in the same import fundamentals. that is because opacity, flaws and regulatory gaps make the system less able to reform its application function, more likely to collapse and more likely to subject investors to harm. when i was invited to join you today, and he berman offered me an opportunity to speak on a wide variety of topics not entirely focused on the dodd-frank act, but if some of us lived and breathed dodd-frank since well before the passage in july 2010th, i'm sure i can

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speak for hours on even the most arcane aspects of that legislation, but i promise you i won't. when i arrived as sec chairman in january 2009, there were some calling to the agency to be abolished or split up and divided among entities. so when the financial reform legislation has been drafted, i took a particularly active role in advocating the importance of the sec's mission, a mission to protect investors and ensure the efficient operation of our markets information of capital. i impressed upon policymakers that the sec could and would step up and fulfill it mission. in the process cannot work with those on the healing at frustration to ensure the sec would have this authority bolstered, not weekend and i am pleased that has occurred. it was a sign that congress appreciated the need for strong sec. at the same time, i'm also proud congress gave his tools and

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dodd-frank that i thought, for example to create a new whistleblower program resulted in high quality tips from insiders at initial firms, to require hedge fund advisers for the first time to register and be subject to our bolstered to proceed with additional clarity in establishing a uniform standard governing conduct of investment advisers or broker dealers and to develop a comprehensive regulatory regime for over-the-counter derivatives among many other things. today is like to focus on a few specific provisions of the act, tying back to fundamentals and mentioned a moment ago in hopes that should the students who are with us today ever put your impressive educations to use as public servant, you will look back -- you look at potential regulation and just display. so let me start with title vii of dodd-frank, part of the active for the first time creates a comprehensive regulatory regime for the over-the-counter toronto-based

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market. title vii illustrates the importance of financial fundamentals on a vast scale, addressing nature of this market with a global notional value of some $650 trillion. derivatives are financial products and derive their value from some underlying theme and one common type of derivative is a swap, which is the financial contract in which two counterparties agree to exchange or sloppiness with each other as a result of things such as changes in stock right, interest rate or commodity price. back in the early 90s when i served as commissioner at the sec and later as chairman of the cftc, it is difficult to imagine the sheer size or potential impact of the emerging market. at that time, the notion of the drip at its market hovered around $10 trillion much of that was comprised of hedging by end-users the risk of currency or commodity price fluctuation. that is companies were essentially using these

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transactions as insurance against anand ursuline. while there were some regulators who appreciated the need to get a better handle on what was going on behind the curtain, industry strenuously object to any regulation and with the commodity futures modernization act of 2000, congress created a huge gap in the regulatory structure by specifically excluding most otc derivatives from any regulatory oversight. the result was a vast market operating behind an opaque curtain, whose transactions are not visible to regulators or other market participants. they got the regulation but thriving markets, namely transparency. not only to be ignored, that should be actively reject it. unfortunately, as we found her in the financial crisis, firms have entered into otc derivative transactions to reduce market risk has simply flawed one risk

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for another. market risk for counterparty risk. opacity in the market made it such that firms could not be sure that the counterparties to their swaps would be loath to make good on transactions if circumstances demand it. in fact, as more and more otc derivatives were transacted across the system, an elaborate network of risk bills to your firms are not only subject to the risk that their own counterparties could not make it a transaction, but that their counterparties counterparties might feel to live up to the terms. increasing risk to the original counterparties and there by train getting it back to the original firm. this type of cross rochon activity has the ability to greatly magnify the shock of a significant default by any single firm. according to the financial crisis, during the crisis there is a real possibility that the default of a single large counterparty could set up the chain reaction that was spread through many interconnected

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institutions. traders in the commission's words rush for the exit. asset values felt our risk management in the absence of liquid derivative markets became vastly more complicated and credit dried up. title vii of dodd-frank addresses challenges in the derivatives market by closing the gaps created by the commodity futures modernization act and bringing the otc derivatives market into the daylight. and working with the commodities future trading commission, we have been writing rolls that fill out an entirely new regulatory regime, one that strengthens the stability of our financial system. these rules do this by improving transparency and facilitating a centralized clarinet security based swaps, helping among other things to reduce the counterparty risk, enhancing investor protection through increased disclosure, regarding security based swap transactions and mitigating conflicts of

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interests of dealers and other major participants involved in security based swaps. by promoting transparency, efficiency and stability, the framework is intended to foster a more nimble in competitive market and enhance regulatory oversight and monitoring by facilitating improved access to comprehensive data on the security based swap market. a report released by a major market participant last year underscores the benefits of bringing financial fundamentals into this market. it predicts that the market for interest rate and credit default swap's will grow by more than 10% by 2013. quote, notional values and derivatives are expected to rise to to increase transparency and counterparty risk mitigation. instead of transacted business behind closed doors, this new system will require certain transactions to be conducted on a public trading platform. once the transaction has

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occurred, the rules will require information about the tree to be reported to a data repository and in turn, the information will be shared with the public. many trees will be handled by a clearinghouse for essentially another the steps in place of the counterparty and effectively assumes the risk should there be a default. despite being handed the lions share of the rulemaking under dodd-frank, and please the sec has now proposed stanch the all the roles that create this regulatory regime for derivatives within our jurisdiction and in some cases has adopted the final rules. this spring and summer, joint me with the cftc, the sec adopted keeble's interpretation on which this entire new regime will be built. we also recently adopted rules regarding our clearing infrastructure, the group of middlemen critical to achieving the goals of title vii. in june of this year, we adopted will specifying how clear

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agencies are just a minute or nation to the sec so they can decide which security based swaps must be cleared. just this week we adopted rules outlined standards for the risk management and operation of clearing agencies. even without the regulatory regime fully in place, more and more swaps are already being cleared, a trend that reduces and should accelerate as the rules come online. to help ensure the system comes online in an orderly fashion, we've drawn about not setting forth the anticipated sequencing of complaints dates for when the rules will take effect. our goal is to avoid the cost to disruption that could result if compliance with all the rules were required simultaneously or haphazardly. market participants have provided comments on this roadmap and we look forward to completing the adoption process for rules already proposed, but not yet final. building a comprehensive regulatory regime from the

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ground up in closed court nation but the cftc and in consultation with numerous other domestic and overseas regulators is an immense task involving uncounted action for details, not to mention hundreds of meetings with them thousands of comment letters to stakeholders. but we will not lose sight of the big picture. if the new marketplace is truly transparent, it will work better and more efficiently for all parties. if you close the regulatory gap, financial markets will be safer or investors and for economies around the world. the market participants focused on title vii generally speaking are large players. airlines that want to hedge the price of a years worth of jet fuel, hedge funds that want to take a bat of a billion dollars on the direction of the euro. but the provisions of title nine, unlike title vii i'm much more likely to directly touch the lives of you and me. designated the consumer

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protection section, it is in fact also full of systemic safeguards. designed to allow practices, which at first seem only to affect individual investors or specific kinds of participants in the financial time. these practices cumulate a shirt financial system to his foundation and despite the difference in the size and nature of the players engaged by title ix, the need to have the playing field defined by the same sort of fundamentals remains. let's take home mortgages. persuading potential home buyers assumed a mortgage has no ability to repay sounds like a classic consumer protection problem. but when millions of bad mortgages are written, bundled and chopped into security, the financial system as a whole shattered. it's impossible to pinpoint the exact moment the financial crisis began, but clearly a major turning point was when bear stearns collapsed in march 2008, drag down by the

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billions of dollars in toxic mortgage-backed securities, two of its affiliated hedge funds had acquired. the problems underlying security began long before they found their way into the portfolios of the high-grade structured credit fund and the high-grade credit enhanced leverage fund. again a fundamental principle is being circumvented. institutions, which profited in the origination they found a way to do so with little or no risk to themselves. during the housing bubble, companies found they could rate mortgages and then sell them off, pocketing origination fee for passing the risky securitization. some origination or no risk -- they had every incentive to lead underwriting standards slide. in the error of interest only, mortgagor renovators fishponds

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at the door with little or no the duration of what the mortgagee's would be able to pay. even before the doc frank act passed, sec imposed legislation to bring reform to this market by requiring the securitize there's a abf provide investors with the date and time needed to analyze independently the soundness of risk offered, the soundness of the investment risk offered by the assets underlying securities, bringing us we were working to do in title vii, greater transparency to an important financial products. this sort of regulation would have given investors insight into the quality of the subprime loans, underlying securities they purchased, giving them the opportunity to discover just how much risk they were assuming and it would've required some risk retention as well. title ix attacks the problem even more broadly.

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the provision attempts to incentivize high-quality origination by requiring the securitize there's retain at least 5% risk of any asset itself. it prohibits the securitize there from directly or indirectly hedging or otherwise transferring away the credit risk. using risk retention to align align the interests of originators and securitize there's if investors minimizes the moral hazard that contributed to the mortgage crisis. the commission commensurate with the banking agencies has proposed rules designed to improve the quality of underwriting and research by originators and securitize there's end it does so as much by ensuring that market forces are in place as it does to regulatory prescription. it protects investors and the financial system as a whole. the commission has also adopted for the rules for asset-backed securities pursuant to title nine. in january 2011, we adopted rules that require securitize

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theirs to conduct due diligence on assets there securitizing and required them to disclose asset representation demand, repurchasing replacement history. and again, this will help protect investors and the financial system as a whole. but that's really just a start. but negligence and sometimes outright fraud that too often marked underwriting was compounded by excessive investor reliance on fatally flawed ratings of securities else on top of these loans. as late as january 2008, 64,000 asset-backed securities were rated aaa. unfortunately, as a senate investigations subcommittee stated, analysts have found over 90% of the aaa rating given to subprime r&d eskin originated in 2000 -- 2006 in 2007 were later downgraded by the credit rating agencies to junk status.

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as i mentioned a moment ago, the sec because womack and designed to lessen investors dependent on reading agents these in the abs market by dramatically increasing visibility into the underlying assets. but dodd-frank further the effort. for instance, january 2011, the commission adopted the first of approximately a dozen required rule-making related to nationally recognized statistical rating organizations or as we all know them, credit rating agencies. in may 2011, the commission published for public comment a series of proposed rules that would further strengthen the integrity of credit ratings, including improving transparency additionally, the sec has acted to end regulator reliance and reduce investor reliance credit rating and to ensure ratings are produced independently of client influence coming yielding more

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accurate data for investors to analyze. for instance, we remove reference to credit ratings in 18 of our rules and about half of those were removed before dodd-frank was passed. earlier this year, as required by the act we established the office of credit ratings up in the sec, which will play a key role as a move to finalize rules, including among other things, proposals designed to prevent sales and marketing activities from influencing production of ratings. proposals to make the actual performance visible to investors, proposals that would require certification by third parties retain the purpose of conducting due diligence related to asset-backed securities. proposals that would establish standards for rating analyst training and competence as well as putting in place a testing program and proposals to require an rsi rose to report on internal controls. in addition, were also

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considering regulations that would require rating agency to among other things are required to protect against any conflicts of interest even more effect of late, provide along with publication of any credit rating enhanced disclosure about the methodology used to determine that rating ever move further references to credit ratings from our rules. the commitment to fundamentals as the basis of reform carries into areas for the connection may seem somewhat less obvious. so-called stay on pay regulations come which give shareholders regular, non-binding up or down votes on executive compensation packages and golden parachutes is one such case. the sec of course expresses no opinion regarding the level of executive compensation at a particular company. rather, our interest is in ensuring that in this matter is in other areas of corporate governance, the shareholders who

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own a company received the information they need to make an informed judgment and that they have a vehicle through which they can express that judgment to the board. today, it appears that the stay on pay regulation affected her sec rules under south korea's leading to improved communications in both directions. it is giving shareholders a clear channel to communicate to their board satisfaction for a lack of satisfaction with executive compensation practices. skipping towards a powerful incentive to clarify disclosure to shareholders and to make it clear, coherent case for the compensation plan that the board has approved. the outcomes of these those are not been on the company under the law run its board of directors for me to not affect the validity of executive compensation arrangements. the advisory vote does however by boris noah shareholders think of compensation plans. companies now have to disclose in their proxy statements in the year following the vote how they

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have responded to the most recent stay on pay vote. now few compensation packages have actually been rejected, but even in many cases were shareholders approved the boris come patient strategy, a significant percentage of shareholders have often voted out. it is our expectation that no votes or even a significant vote against the company's executive compensation practices will force for us to ask themselves some very tough questions about the compensation policies and whether they're communicating effectively with shareholders about those policies. the stand pay regulations also require companies to provide shareholders with an advisory vote on the frequent the stay on pay those at least once every six years. we understand that most companies consistent with the preferences of their shareholders have determined the whole stay on pay those every year. to me, this demonstrates a shareholders want war to

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maintain focus on executive comp nation and i'm hopeful that the stand pay those will focus for us on the incentive they're creating through their compensation policies. in this respect can stand pay bills and regulations the sec adopted in 2009 that asks companies to detail the relationship between risk-taking and compensation into more fully discuss their approach to managing risk in this regard. regulation that probably facilitates for shareholder communications on the subject of risk management, whether through disclosure generally or stand pay deliberations will result in greater board attention to risk-taking incentives and companies that are more resistant to the kind of financial epidemic that spread so rapidly from firm to firm in 2007 and 2008. the financial world is full of zero-sum games. if one party of currency swap winscombe and the other party

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loses. if you sure to stock a mere profit or loss is exactly the same as the lesser profit incurred at the entity to buy your shares. the financial reform really is like that. of course in individual cases come investors and consumers of financial products and different priorities and than brokers and banks. broadly speaking, good regulation rooted in fundamentals frankly no secret, transparency, risk management, fairness probably benefits all stakeholders. transparent markets more efficiently distribute capital. fair market spring investors and their capital into the game. properly allocated and managed risk herbs are rational behavior that have devastating comp classes. it's really not that hard to figure out. unfortunately there are powerful individuals which profit at least in the short run print inefficiencies, from differentials in power and taking rational risks, knowing that process and competence

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nation will accrue to them, losses are often assumed baker's dimmers, shareholders, taxpayers in the economy at large. i think dodd-frank recognizes this and builds a comprehensive structure and strong principles that protect both investors make wall street were better and we're down to the benefit of the financial system broadly. thank you. [applause] >> chairman schapiro his family offered to take a few questions. if you miss to ask a question, please raise your hand. one of ours and volunteers will bring a handheld next to you. >> i can't see anybody. it's really bright up here. >> questions for chairman schapiro.

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>> thank you for your opening remarks. i was wondering if the sec was willing to adopt the financial stability board, kind of guidelines on executive compensation reform that the europeans have adopted. i'm not sure whether or not the u.s. is voting in the same direction. >> you know, it's an ongoing subject of conversation at the sec. i have two responses. one is we have jointly proposed with the banking regulation agencies with executive compensation disclosure rules, including hold acts and delete chaos and so forth. we've gotten a mansion a lot of comments and most are finalized yet. we're working with other regulators to do that. the second thing i say is the sec's approach in the air of

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compensation has been a disclosure-based approach. if you look at the history of rulemaking in this area, you can see ever greater requirements on public companies to disclose compensation policies and practices, including bowls we did shortly after i arrived i require the compensation committees or boards to explain how their compensation prior says may incentivize risk-taking what the board is doing to manage that incentivizing of risk so that the franchise in shareholders money is not an duly put at risk are the compensation practices. submit detailed compensation schedules that are contained in corporate filings, detailed disclosure about not just base pay and incentive bonuses, the perks and other components of compensation. but we've attended at the sec with exception of the work were

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doing under dodd-frank to take a more disclosure-based approach. >> thank you very much. >> thank you. and again, thank you very much for your remarks. it's really an awesome task that the regulators have been put in to develop this regulatory framework over-the-counter derivatives contracts. i have two questions. we are not ian langton away from all the lateral influence. and it concerns me that the sec and even our banking regulators are worried about, you know, other multilateral issues that are kind of put on us by way of g20. u.s. components of the g20 is it repealed. so one issue is whether our regulatory framework, especially for the banks of the big financial institutions is

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influenced and you may not be over the speed to basel, but the complications about our financial institutions under the power can get away with because they say that wearing these other jurisdictions and so it has some kind of a leverage and away against the sec. how do you handle that? and what about fair value? and income of the over-the-counter derivatives contracts have not been able to enjoy balance sheet accounts so to speak. and so under a fair value reporting regime, the markets need to be stable. 2008 is an away stake out the quantitative easing. so we're really not regulatory framework of us to get rid of the power of accounting what is the nature of the dramatists contract.

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>> schapiro answer that. >> when we tackle the first part because it's schapiro answer that. >> when we tackle the first part because it's a very fair question. it's very complicated and it's very challenging to regulate in a world were virtually nothing status or physical borders borders of the united states. and it's so particularly true in financial markets, where the velocity with which money and transactions pass around the world is quite extraordinary. and so, we can't assume that we can do only what we think works in the u.s. markets, although clearly the u.s. markets are our primary concern and focus. the way to go through these issues is we have dodd-frank energy 20. ipg 20 there's broad agreement with respect to the derivatives market and it's been reemphasizing recommitted to buy the g20, including the united states over and over again. it's a value clarin, value

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transparency straight reporting. it's the value of collateral a thing and marketing positions and so forth. so given the very highest level agreement, we were tempter every country's individual regulatory regimes to legislative processes. one of the challenge is frankly the mismatch and timing. dodd-frank was pastor for anywhere in the world. the japanese are the closest behind us and we set about to do as congress has directed us to implement the regulatory regime. regulators are working together extremely well. it's a huge component of our job to try to coordinate and collaborate to the greatest extent possible, understanding we have different underlying legal regimes in different underlying processes. to give you specific examples, chairman gensler from the cftc and i have cohosted to very

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detailed working sessions with principal regulators of derivatives markets around the world in the past year. all have our next session in early november. we're trying to work through the details about a regulatory regime looks like in comparison to haitian government says well. our goal continues to be to try to create as collaborative and regulatory regime as we can possibly can understanding that we won't be able to be identical. the goal is obviously to not have transactions go to the jurisdiction with the lowest standards. nobody wants to see that happen. the goal is also to not have multilateral institutions, multinational institutions subject to conflicting roles in retirement in different jurisdictions so it becomes impossible or invariably costly to do business.

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so it's a major reason why it's taken as long as it is, frankly, to get the derivatives regime in place because collaboration and consultation takes a lot of time. i'm continuing to be optimistic that we work through the regulatory colleagues around the world, you know, a reasonable framework that will serve the goal of closing gaps and not create opportunities for regulatory arbitrage. >> the sec has announced a goal of reducing reliance on the large reading agents be. we've also raised the cost of regulation to those agencies because there's more disclosure. you describe the greater transparency. how would some on the rating

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agencies be able to shelter those kinds of regulatory expenses and be able to create debate three rating agencies. his very problem there? >> it's a great question and one of the goals of the regulation has been to try to encourage more entrants into this space so that we don't have what is essentially three rating agencies doing north of 90% of the readings work. it is really important for regulators to reduce reliance on ratings, given that investors have excessively relied on them as we saw through the financial crisis, without doing any -- without doing their own due diligence to ensure that the ratings weren't problematic. and frankly, the model of rating is company issue came out of our issue securities that pay you the rating agency to give me a

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rating. you can all see what the conflict of interest there and it's a very strong conflict of interest. we've had new entrants into the leading agency face within the past year or so, we've got anything to new entrants. so smaller entities are finding a way to create a niche in the market that works for them. they don't wait the full range of products. the new entrants may be specializing in particular areas, which is a less expensive way to enter this space. we are also looking at is we are required to under dodd-frank, whether there's another business model we can be supported by the. we've got the issue of pay models. there's also a subscriber pay model, what the person, presumably the institutional investor actually pay for the rating. something called the franken amendment ask us to look at whether there are to be a self-regulatory organization or a government agency that selects

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the rating agency, does into the rating, the selects the agency for each product transaction so you break some of the bond between the issuer pays for the rating and the selection of the rating agency and the agency itself. so we are producing a report to congress that will bring the cost and benefits than the practical implications of some of these alternative models to see if some of them might make any sense. but we have had new entries into the space and will continue to see it be an appealing place for people to be. >> i think we have one more question. >> hi, just very quickly, the sec with the cftc, the front-line regulators, the most important markets in the world as i can say what their typical self-centered in the united

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states. and what we have with financial reform are basically tiny underfunded regulatory agencies going up against the dreaded its market penetration i, government complexity and otherwise. and we've got a cftc with $200 million budget and an icc was set in more than a billion dollars budget. it seems to me one of the big problems we have is a big component of the industry's attack right now is to defend agencies. you haven't got the resources and the sea of d.c. haven't got the resources. i'm not asking you to comment on that. i'm also not going to ask him although i think anybody who really cares about our capital markets, when viewed sensibly carry the way jamie diamond says he is or if it's a man on the street should be advocating for more money for the agencies, you can't do that, but others can.

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leave aside the president's budget and your budget requested constraints. in your view theoretically, if the sec had the budget it needed to do its job, but without the jp? in your term is coming to an end. [laughter] but i mean, i think it would put in context the battle you're against and what you really need for people who care about what you do should be focused on. >> every year we do submit a budget that is the amount running we think we need to do the job. and we frequently don't get that number as you point out because of the budget process. so we're pretty open and honest about our budget submissions what we need to do and if we don't get that about money, but we will not be able to do. in my almost four years at the estes he can we've invested heavily in technology because the agency's technology is really any pretty dismal state. the agency never has before

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people think that's great you don't need so many people because you're using technology. maxtor is for my entire career's technology allows you to work smarter and better and more efficiently, but it actually doesn't diminish the need for people because you find so many more things on your technology he to do market surveillance, to look for insider trading and market manipulation and analyze our mbs and how they've been structured and see what the flaws are. so while we put a big heavy emphasis on technology investment could we also need to invest in our people and we been able to grow a little bit in the last couple of years, not enough, but a little bit. i can't really give you a number. i will say that we are at agents to just under 4000 people, with extraordinary broad responsibility. everything from accounting standard-setting oversight to money market funds and mutual

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funds, to market berkshire. we all read every day about market structure issues come into broker-dealers and how they interact with customers and investment advisers, to rating agencies and transfer agent. this is an extraordinarily broad scope of responsibility and no hedge funds which have been added to our plate and otc derivatives. we have an extraordinarily broad remit at the sec and we need sufficient funding to both keep up and keep even with what's going on in the industry so they can evolve as quickly as the industry can to respond to issues for systemic in nature and which really impact individual investors well-being and their confidence in the integrity of the marketplace. so will continue to fight like crazy for additional funding. i have for four years. we got close to cell funding, with the bank regulators all enjoy. they don't go to congress for a

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budget. they create a budget and limited. we are not funded by the taxpayer. in fact, with a big match funding come which means cutting the sec's budget doesn't need the money to go anywhere else. we are funded by wall street fees. if you cut our budget come to cut expenses on wall street. so we think having notched funding is a great step toward self funding, but the real answer is under obviously oversight of congress of which we applaud to be able to establish what it needs an fund itself to get the job done. thank you all very much. >> chairman schapiro. [applause] >> chairman schapiro, we appreciate your willingness to share your views on the ongoing work of dodd-frank reform. we are proud to have you distinguished alum of the law school. we appreciate your long service to the law school as well as

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your distinguished public service. i'd like to give your small token of our appreciation. become hope you'll come back often again. [applause] >> so will reconvene about 9:30. so go get a coffee or whatnot.

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>> one of 10,000 homes that they are trying to get done in the next four years -- in this term. these are houses never coming back. [inaudible] >> now, not right now, no. [inaudible] they're going back to the prairie and these are just disappearing from the landscape. >> is 90,000 rate are ready to go. >> recently 164 firefighters were laid out as part of the downsizing, as part of the effort for mayor in to get the finance under control in the city. so firefighters, which detroit needs because it's got the highest case of arson in the country has gotten laid off. about two weeks later, miraculously 100 guys are

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rehired. when you look to find out what the money came from, it's the department of homeland security has a fund for things like that. i don't want to overstate, but that's something you want to think about. the department of homeland security step in to keep the charade and save as it can be for the moment. it could be a lifesaver. i wondered making this film, we see in the auto industry bailout, the big bailout. are we heading into an era of bill as a cities? is there such thing as a failed city panelists examine whether the dodd-frank act regulates enough to protect the nation from another financial crisis. speakers include general counts are for both the federal reserve and the federal deposit insurance corp.

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this is an hour and 20 minutes. >> good morning. i am honored to be the moderator of this distinguished panel. i know we're going to have an interesting discussion and hopefully a little debate. good news is we won't have to compete with monday night for all in the baseball playoffs. gentleman, but may take a couple minutes to set the stage for a discussion. what is fascinating is the dodd-frank act, landmark financial reform legislation has provoked more controversy and discussion since it's been passed and even before it was passed. 2010 was a pretty easy call in some respects going into the 2010 election cycle because public opinion polls overwhelmingly seem to demonstrate americans had vivid

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awareness that a mere inclusion of the international and u.s. economy had been narrowly diverted by a massive infusion of government capital into the financial services in history and trillions of guarantees him acquitted the end that the crisis is basically caused by some combination of risky and abusive austria parrot says mrx government policy and oversight. and that crucial bull, the dodd-frank act was formed. in so doing, it's every major provision seems, many provisions haven't even had limited, seemed to demonstrate controversy, whether it's the creation of the consumer financial protection bureau, do today to sell policy of the federal government, the

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skin in the game roles, the vocal rule, the noticeable absence of gse reform. the bottom line as the signing of the law signals not the end, but rather the beginning of a vigorous debate about its provisions. before we start, i want to read a few quotes, most notably president obama and governor romney and the most recent of the first presidential debate on october 3rd. governor romney, every free economy as good regulation. the same time regulation can be excessive. the dodd-frank act had a number of provisions of unintended consequences harmful to the economy. it's kind of reasonable and small banks. i would repeal and replace it. president obama: the reason for such an economic crisis has prompted by reckless behavior on wall street, but he answered it risk. we stepped in and had the toughest reforms on wall street since an 18 piece is that the question is, does anybody out

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there think we're too much oversight and regulation of wall street? senator warner of virginia, who subalterns crafting, congress never get to write when you look at massive reform legislation the first time through. he directionally had in the area and come back two or three years hence to the corrections legislation. secretary of the treasury, tim geithner and "wall street journal," strong defense of the dodd-frank act, asking to remember the financial crisis that to those made come when you read about the hundreds of millions of dollars spent on lobbyists trying to weaken or repeal financial reform. the reforms are not perfect, but if they been in place, it would've limited the crisis. community banks, basel three capital requirements and increased dodd-frank regulatory burdens were intended for big banks and will be effectively putting community banks out of

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business. and she strangely enough, citigroup executive sandy while, in interview with cnbc score box. which is split up investment from banking, have banks be deposit takers come in the commercial real estate loans, have banks not risk taxpayer dollars, banks that are not too big to fail. former fdic chair, she would bear concluded the law clearly establishes framework that allows financial firms to fail while preventing catastrophic harm to the economy. it effectively ends too big to fail and taxpayer bailouts. and finally, mac tv of "rolling stone" magazine. we could spend all night on

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posts about the financial crisis and a lot of them would have bad word but we can't use here. but i will just conclude with a quote from a recent article by hand on lobbying efforts on dodd-frank. quote, the system has become too complex for flesh and blood people who make the mistake of thinking passing the landings the end of the discussion when it's really just the beginning of the war. so gentlemen, the question is on the table. the dodd-frank, too little, too much. an alaska dirt, just right? >> it's a great pleasure to be here. i want to thank john buckman and the gw law community for giving me the opportunity to speak and be on this panel of members with

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the point of view. hopefully it will be an educational few minutes for you. to figure out whether the dodd-frank act went too far worse just about right, you have to start with an understanding of where the dodd-frank act is. while much is still speculation, there's enough substance that are deep inside in the act but it's useful to begin a discussion about the efficacy of the basic tenant of the dodd-frank act. so beginning in the summer of 2008, through the enactment of the dodd-frank act, during and following the worst financial crisis since the 1930s, the federal reserve and the other financial regulators asked congress for three types of tools to address them to the extent possible, send out incidents that would threaten or harm financial stability.

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first, we ask for authority to take stability of the financial system into account in the supervision of financial firm and beyond the tradition of safety and soundness of individual firms. second, we asked for action by congress, or other authority for the agencies to fill in the gaps in the framework established by congress in the original regulatory system to cover parts of the financial system that were not covered and to allow some regulation of the shadow banking system. and third, we ask for a mechanism for implementing an orderly downsizing or unwinding of a failing firm outside of bankruptcy. so the dodd-frank act tried to address issue these requests among others. on the first one, the dodd-frank act provided to banking agencies and other agencies enhanced supervisory authority focused on financial stability.

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in particular commentary section 165 of the dodd-frank act, which requires more stringent standards to be applied to the large bank holding come any into firms designated as systemically importune by the financial stability oversight council. wcny-tv required enhanced standards in the standards of overrated areas, capital, liquidity, risk management, stress testing, risk committees, risk management, counterparty exposures, resolution planning and a whole bunch more. so what is new about this? what is new is illegal and supervisory basis for all these authorities is financial stability. we already have standards in these areas that were focused on the safety of soundness of individual firms, but now we were given authority to consider all of those areas and whether there were some effect on

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individual on financial stability or the systems affect an individual firms. that gives you new dimension to how you look at all the standards. the other thing is news that it extended the standards to nonbanking firms designated by the fsoc as meriting supervision, so this began to fill the regulatory act that was posed some of the risk to the financial system. another area congress provided with the requirement that the agencies consider the effect on financial stability of every bank acquisition by a large bank holding company.

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>> there's more to do, but we've begun that task. the dodd-frank act expanded authority to identify through the examination process the

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practices that at financial firms that pose a threat to financial stability so this allows the agencies to use one of their most powerful tools in understanding better how the system works using that tool in holding companies and banks and thrifts already subject to supervision, and finally, i'd point out among the many tools is an early remediation authority that allows agencies to increase intention and -- based on measures other than just the capital of the organization so based on risks that they take or exposures they might have beyond their capital position. these are all tools we're flushing out. it will take time to work out. they have costs on the financial system and need adjustments.

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the agencies doing their best to get the frame work in place for supervision as best we can at the beginning, but as senator warner mentioned, as jerry mentioned that senator warner is quoted as saying we need to come back and revisit this as time goes on to try to get things right. it's very hard to eliminate all unintended consequences from the start. now dodd frank responded to the second request for tools do address gaps in supervision by establishing the financial stability oversight counsel, a collection of heads of all the federal regulatory agencies that oversee the various parts of the financial system plus a new federal office of insurance and representatives of various state regulatory agencies. the fsoc is charged with monitoring financial systems with merging risk to stability, recommending to member agencies actions to address risks the financial stability,

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recommending steps to congress to fill gaps in the regulatory system and weaknesses in the functions of the financial system. designating non-bank firms that pose risks to financial stability, but live largely in the supervisory shadows or merits some enhanced supervision and regulation among other things. fsoc has begun the work publishing a number of reports and studies, the kinds of things that agencies have to do. it's published guidelines and how it will approach the designation process, how it's thinking about financial stability, the factors it considers, and it's begun reviewing large firms, large and complex firms to see if designation is appropriate and making recommendations to congress. it's beginning to work in ways that i think dodd-frank envisioned. on t third point, estg a mechanism for winding down large financial firms that pose a risk to financial stability of

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the economy as an alternative to bankruptcy, i'm going to leave to rick from the fdic who is an expert in that area, but i'd like to end with some personal thoughts about where the dodd frank act fits in, and dodd frank is built on the modern model of addressing and prevents financial crisis. that is government supervision in regulation is necessary to monitor and offset the extremes that come with self-regulation in a capitalist society, and it's built on the idea that government must impose discipline on businesses where they have the incentive to take outside risks that could have potential harms to society generally. now, neither extreme of self-regulation or government regulation will assure there's

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no financial crisis ever again. we are, after all, a system of human beings. the question is whether we're preparedded to accept the cost and benefits of the system we choose to implement. the dodd-frank act, clearly, has got costs to it. it has greater regulation that will affect how businesses run. that will affect how they provide services to us, the cost of those services, what services they provide. the question is whether dodd-frapping also creates 5 safer system than we would have without the dodd-frank act so i believe that the dodd-frank act has the potential to reduce the costs and to make a safer system if we implement it wisely. though i am quite humbled by the idea we'll never be able to prevent all financial crisis. i look forward to today's discussion and the enlightenment that comes from interaction on different points of views on this.

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[applause] >> good morning, everyone. it's a pleasure to be here to discuss this important and timely topic. jerry, i want to thank you, and it won't surprise you that i wholeheartedly agree with the position that dodd-frank ended too big to fail, so before addressing titles i and ii, i want to point out that dodd-frank actually addresses a lot of others as well, one of which increased deposit insurance coverage to $250,000. you should be thankful for that as well. [laughter] shortly after the statute was enacted, the fdic created an office of complex financial institutions to address these

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issues, and, you know, we have two titles that intermesh here. under title i, the largest bank holding companies and systemically important financial companies have heightened supervision, and the companies are required to submit resolution plans or what we call living wills to demonstrate how'd they be resolved under the bankruptcy code, and after, actually, last september, the fed and fdi dr. issued a joint rule to implement provisions under 165 of the act, and the first plans have already been filed by nine institutions filed in july of this year, and they were already in the process of reviewing those plans. under the regulation the second set of plans due in july of next year. the first due for institutions of $250 billion or year, next set is for 200-250 billion, and

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next july, at the end of the year, those are between 50 to a 100 billion dollars. we already reviewed the first set of plans for completeness, and we're making appropriate communications with the institutions, and we're in the process of doing credibility we views. now, if we don't find the plans to be credible, and this is an interim process, the company can submit a a revised plan, a more detailed plan. we could, if the plan doesn't meet requirements, impose stricter requirements with respect to capital and the fed and fdic have to agree on this. if the company fails to submit a satisfactory revised plan within two years, we can actually, in consul consultation with the fsoc, direct the company to the best assets or operations that would be necessary to facilitate

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an orderly liquidation. they have rules for those with the resolution plans. they are subject to the fdi act, and requiring institutions to sthoa that the resolution could be done in a least cost mapper which is what happens under our statute. detailed resolution plans provide valuable insight into the inner workings of the complex institutions and industry in general, and they allow us too further refine our existing resolution strategies under title ii. our efforts, therefore, serve as a foundation to planning activities under title ii in the event a systemically important financial company fails or enters into resolution.

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again, it also, as scott mentioned, we have a heightenedded supervision by the feds that hopefully avoids us getting into a situation where the title ii authorities have to be implemented. turning to title ii, during the recent financial crisis, we lacked the authority and the powers now available under this resolution authority, basically forced to either choose between bankruptcy or bailouts. now, under dodd-frank, bankruptcy remained the first and preferred option in the event of a failure -- and bankrupt remains the first option, and we only turn to title ii if resolution under the bankruptcy code has an adverse

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systemic effect on the entire system. the policy goals of title ii are to liquidate one to mitigate risk to the financial system and minimizes moral hazard. the statute prevents any taxpayer bailout providing a liquidation process to prevent a disorderly collapse and ensures taxpayers do not bear the cost, and that requires that management and directors and third parties responsible for the company's failing condition are held accountable. now, how does this work? for the fdic to be appointed as receiver for a sifi, we have to have a recommendation, determination, and an expedited review process that's available similar to the to the --

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authority we used in the last crisis, which i thought we'd never use in my lifetime, but it's pretty amazing, and it vols a super majority of the fdic board determines there's a systemic risk to the financial stability of the united states, super majority, the federal reserve board -- recommendations made to the secretary of the treasury who, then, consults with the president of the united states and makes a determination to appoint the fdic and meet with the fsoc as well. if it's a broker dealer, the fdic is the dealer and then if it's large companies, that's the federal insurance office. the secretary of treasury has to make seven specific findings to support the resolution he has to find the company in default or

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in danger of default and the recommendations have to indicate that the failure of the company and resolution of the bankruptcy code would have serious adverse consequences for the financial stability of the united states. i'm not going to go through all seven. you can look at the statutes in section 203 of dodd-frank, but, also, we have to -- obviously, the company has to meet the definition of a financial covered company under the statutes. once that determination is made, the company can consent for an appointed receiver, giving notice. if they don't consent, then there's a expedited process here in dc for immediate judicial review. the court has 24 hours. the case is filed, the court has 24 hours after receiving the

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petition. the court does not act within that 24 hours, the appointment is effective as a matter of law. the court's decision to allow the appointment is not subject to stay if it goes up on appeal of the what the point is the fdic has broad authority, similar to the authority we have in dealing with financial institutions under this fdi act, and similar to the super powers that we've used over the last 75-plus years to resolve financial institutions in a way that don't disrupt the economy and maintain confidence in the nation's financial system. some of the powers include the ability to create a bridge bank. the ability to stay litigation involving the company, and we have the ability to create, and we have a claims process. the statute imposes losses on shareholders and then to the creditors. we can repudiate contracts,

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enforce contracts otherwise terminated as a result of our appointment. the statute alaska provides for liquidity from an orderly liquidation fund to sustain assets and operations of the company and its affiliates. the orderlily liquidation fund is at the time the group is form ape prohibits taxpayer loss from arising from the resolution of the institution under title ii. funds can be borrowed from the orderlily ql fund to be repaid in full, first, from the assets of the failed institution, two, from callbacks, permit of the statute of those responsible, and, third, if necessary, an assessment on the industry. now, fdic made a priority to

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have rules to implement the division. the primary regulation is a comprehensive rag dealing with the orderly resolution authority, and that's codifieded at 12cfr part 380, and we did an interim final rule back in january of 2011 and final rule of july of 2011, and that rule provides for the priority of the payment of the creditors, the authority to continue operations by paying for certain services, provided by employees and others, recruitment of compensation pay, callbacks from executives, administrative claims process, and all of the other needed tools there. in june of this year, with the treasury, we issued a joint final rule concerning the maximum obligation limitation. this rules clarifies the amount of outstanding obligations that we can issue and have leaderships under title ii. through the use of the orderly

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liquidation fumed. we have subsidiaries by the fdic's receiver that basically provides that, you know, sometimes these contracts provide in the event of insolvency they terminate. this rule allows us to contract -- continue contracts to maintain services and maintain the value of the subs and the institution. this, actually, is very critical to one of the methods we're looking at called single point of entry resolution because that allows us, again, to continue operations at the subsidiary level. now, we've also created a systemic risk advisory committee made up of 19 members, prominent individuals, former fed chairman

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volcker, cohen, other folks, john reed, and they immediate periodically to provide discussion on a broad range of issues regarding our resolution authority for the companies under title twa. we've held round tables, and that process is helpful as our thinking in the area continued to evolve. let me talk about one possible resolution strategy that we've been talking about recently under title ii identifieded adds the single point of entry method. it's the prefer the approach if there's no financial company in the position to acquire the failed institution or where an an acquisition could cause an increased concentration of risk. that was one of the issues in the past with large institutions doing an assumption, it's a

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larger institution, and you get more of a concentration of assets this dodd frank tried to avoid under section 622. this method is outlined in great detail in acting chairman's speech back in twai -- may at the federal reserve bank of chicago, and i recommend you look at that it you're interested in more of the details, but bayically, we're appointed -- basically, we're appointed receiver as the parent of the holing company of the financial group following the company's failure in going through the appointment process, and immediately following that appointment and placed in receivership, a bridge financial company formed with assets of the failed institution being moved over and including investment and loans to the areas to be transferred. the newly formed bridge company will continue to perform the

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systemically important functions of the failed company through subsidiaries minimizing disruption and including the risk of spillover effects on counterparties, and subsidiaries domestic and abroad to continue to maintain their operations and remain open. the bridge financial company would have access through the fdic's borrowing of the orderly liquidation fund to provide liquidity to the operations of the subsidiaries. following the completion of the process, the company could be a new financial company and complete with the idea that the enterprise could be recapitalized by creditors in the failed financial company receiving a combination of cash, equity, or new debt in a new company in satisfaction of the claims against the receivership.

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this strategy returns the company to prieved ownership in the shortest time of possible avoiding an even bigger too big to fail company. it promotes state confidence in the man tan. international cooperation is a big issue in connection with of how we're going to do this. there's been a lot of work done. certainly, there's been increase in the degree to which the companies operate across national borders. obviously, resolution has to be coordinated internationally to reduce the risk of disruption so there is no current international insolvency frame work to resolve a globally systemically important institution. in a comprehensive manner, and

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sco we need to do advanced planning and coordination between the counterparts and other countries and ourselves to determine how they operate to reduce the risks to the global financial markets should that firm's failure occur. we've made significant efforts to identify and begin to overcome cross border impediments to resolve. under the single point of entry approach, that might mitigate the number of obstacles that could complicate resolution because the subs could be open and operate. the fdic and federal reserve and other u.s. authorities formed crisis management groups, and under the auspices of the financial stability board for each of the u.s. based companies, and we are -- the crisis management groups are intended to enhance institution

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specific mapping for resolution engaged in ongoing meetings and dialogues with those entities. we are actively working on a bilateral basis with foreign supervisors as well and jurisdiction over foreign operation in key u.s. firms. it's interesting because they tend to be highly concentrated in a relatively small number of key foreign jurisdictions like the united kingdom. in our initial work with the foreign authorities, it's been encouraging making substantial progress with the u.k. counterparts in understanding how a possible resolution works and treated under existing u.k. law, and we're involved in in-depth examinations of potential impediments to affect resolutions, and we're working on a ceerptive -- cooperative basis to overcome those. in conclusion, we have new

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responsibilities to address the risks associated with the recent financial crisis. we take the responsibilities seriously, and we are ready to use the new authorities when they are needed; hopefully, not. while the key provisions are now in place, we are continuing to implement remaining provisions for rule making, and we continue to refine the thinking on the process, and we certainly appreciate the opportunity to engage in dialogue and to increase transparency and awareness of the markets on these powerful new tools and how they can best be used to maintain financial stability and end too big to fail. i look forward to participating in the q&a and hearing from the views of the others. thank you, all, very much. [applause]

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>> well, now for the downside. [laughter] first of all, i want to thank professor bucman and wilmar for organizing this. it's a really excellent panel, i must say, and i always enjoy being on a panel with scott and with rick so it's -- i think we're going to have an interesting discussion. [laughter] i want to take on just about everything that was said so let me get started. i have 10 minutes to do this. title i. tide l i of dodd-frank. right now, as you heard, it designates, in effect, the statute designates 36 bank holding companies as libel to create instability in the u.s. economy if they fail. in addition, it goes on to permit the financial state of

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the oversight council to designate an unknown number of additional notary public-bank institution -- non-bank institutions that could create instability in the u.s. economy if they fail. what does it mean when congress gives this authority to the fsoc or designates these -- this notion in the statute? what it says is these institutions are too big to fail so not only are we worried about the problem of too big to fail, but we have now made the problem worse by actually embedding it in the statute for the banking institutions and permitting the fsoc to designate certain institutions, and we understand just from reading the newspapers as we have for institutions in mind that are large insurance companies and in one case a finance company, to be designated as too big to fail. okay. what does it mean?

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what effect does that have? the effect it has is creditors look at the institutions as much safer investments than others. first of all, once they are so designated, they are supposed to be regulated industry -- strigently by the fed. we don't know what "strigently" means, and there's a number of constituents as to what that means, but in any event, creditors would be dliebted by this because whatever it means, it means they are taking less risk than others that are not regulated industry gently, and there's no value from risk staking. shareholders like risk taking. creditors don't like risk taking and don't benefit from it so

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they will be happy to provide funds to these institutions at lower rates than they provide to their competitors. there is a real danger that these additional advantages, these funding vangs will make these institutions superior competitors to the others. now, from time to time, we hear people say, well, everyone is objecting to the idea they might be designated and treated that way so that must mean it's not going to provide a benefit, but, in fact, it does provide a benefit. the -- the fact that they are octobering -- objecting comes from the fact they are then under the control of the federal reserve, and almost every business does not want to be under control of any other organization. the fed has an opportunity to control their leverage, their

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liquidity, their capital, their activities -- all of these things in the interest of preventing them from taking risks, and so when your company is turned over to the fed, the answer is that you have stopped running your organization, and so, of course, they all want to avoid that hostility. the danger that i see is that this creates too big to fail in a way that is -- was ambiguous at one time in the past, but it is now, as i said, embedded in the statute. okay. title ii. another similar problem. as rick outlined, the secretary of the treasury can seize any company that these are not necessarily sifis. the secretary of the treasury can seize any company that is a

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financial company and following the process that he talked about, one day for a court to review, the likelihood that a court will actually turn down the secretary of the treasury after having talked with the president and so forth is highly unlikely so these institutions will be turned over immediately to the fdic. ..

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to bail out the short-term creditors. and the reason you want to do that is to keep them from running. the way you prevent the kind of event that occurred after lehman brothers is to make sure that the short-term creditors at various institutions are not afraid that their institution might also be seized by the secretary of the treasury. so what you want to show immediately as he will be taking care of. you don't have to run and that would reduce the panic and markets. that is something fdic is empowered to do and i suspect if we should ever have another financial crisis like the one we had, which i think actually it's very unlikely, but assuming we did have such a financial crisis, that is the way we would make it less likely to effect the entire structure that creates the entire structure of the financial market that we had

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before. now looking up the way the act has developed so far, i have to say is wildly off track in on its way to becoming a train wreck. let's look at this rate. davis polk as many of you know has counted up all of the regulations that have to be made by the various agencies under the act. what they found as there's about 240, 250 of these regulations. one third have been finalized in over two years since the act was passed. one third have been proposed, but not finalized and one third haven't even been proposed. the vocal role is a great example of this. the folk world is certainly hard

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to understand. is this simply banks cannot engage in proprietary trading. not okay, we understand what proprietary trading is. it means the bank cannot use it to assess your trade. i was back to be risky, although no one has ever suggested that it had anything to do with a financial crisis, but not banks cannot engage in proprietary trading, but they can engage in market making and in hedging. wow, how do you define the difference between market making in hedging on one side and proprietary trading on the other. i suggest it's very difficult to do that unless you're inside the head of the traitor and understand what the rationale for the trade was which makes it extremely difficult to address the regulation and that's one of the reasons why we have no final regulation yet on the vocal

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role. similar, things have happened out in the housing field because what congress did was specify -- they're trying to address student controlled the securitization process and so they created something called a qualified residential mortgage qualified mortgage and told the regulatory agencies to tell everyone else what does terms mean. the regulatory agencies have not yet been able to do that. there was a regulation put out by regulators about a qualified residential mortgage, hugh cried not only in congress, but also in the industry and the regulators with tool and we haven't heard another word since then about when the next regulation will be now. qs is to be decided by the consumer financial protection bureau. q. i'm is very important because

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ineffective turns around the question of who is responsible for a loan, the quality of the loan. it says that the lotus make to someone who cannot afford it, and it is the wonder who is responsible, not the borrower. so it becomes very difficult for lenders to understand what their rights are in dealing with foreigners. and the most severe problems there and safari were in these circumstances, if he or she has borrowed funds veterans at the borrower cannot afford, then the borrower has the right to defend against foreclosure. so that not only affects the immediate under, it affects all of the buyers of this loan up

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the transaction to securitization process and makes it very difficult than for any of us to be sold unless you're absolutely sure that many of these fires actually could afford the loan they received. so this will impose tremendous caution on regulators and i'm lenders throughout the process and that will slow down the growth of our mortgage market, another very important element. in the derivatives field, regulations have been put out by the cftc. in fact, they are ahead of agencies near the regulations are now so costly and search are going to the industry that they are turning around the whole swap market, so instead of functioning under the swap roles that the agency has created, they are turning to the futures market and trying to turn swaps into futures so they don't have to comply with the swap roles.

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now that says a lot about the kind of regulation that the dodd-frank act has demanded that the regulatory agencies and shows in fact this is going to be an unworkable statute. now what does it all mean in the end? what it means in the end i think as we are going to have a lot of uncertainty in our financial system for a long time. i believe that the dodd-frank act is substantially responsible for the very slow recovery we have had from the financial crisis since 2010. in the nine or 10 months between the end of the recession in june of 2009 in the final debate, the average growth of the economy was about 2.5% in the gdp. since that there was passed, the average growth is 2%.

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while the men said, it's been slower than the year before. i think the reason for that is the uncertainties created by the dodd-frank act. so one may feel, we have already stymied the growth of our economy. once these regulations start coming out in greater detail, and there will be lawsuits about them by every industry and every company and those wall street will have questions about the validity of regulations and to grant those powers to the regulatory agency, all that litigation would take many, many more years and will continue to slow down the growth of the economy. so my view, if i had anything to say about it, would be that we ought to repeal the dodd-frank

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as governor romney has suggested, we had to repeal and replace it with those things that are necessary. and i'm afraid there's very little in this act that is necessary because the financial crisis is not caused by the plenty of power in the bank regulators to regulate the economy, regulate the banks operated and it actually doesn't give them much more power come except to say you must now do this much more stringently. so from my perspective, we had to repeal the act, replace it with those things that seem sensible, but should probably be a commission of some kind, that takes over the actions of the consumer financial protection bureau, but not the administrator idea developed in

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insulating the person from other kinds of controls by the president or congress. all those things go back into a statute, but at this point is probably better for our economy and the growth of the economy to repeal the act. thank you. [applause] good morning. i too am here, happy to be a risk not in wrecking cherry, no one else. [laughter] i too want to thank george washington and art and others who have done this. it's a terrific program and its good they do it every year. i hope after my remarks i can get after it again. a nonprofit organization that promotes the financial markets.

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to ensure i deserve the complement the way wall street loves to hate, i think i make a few comments and some overarching issues that are often a spoken. there's a lot to say, not much time and i'm from boston. i talk fast, so if you're thinking of sleep income you want to leave now. to pick things what peter had to say and many of my remarks will address them. they say i disagree down the line is an understatement. it ignores the fact is an implicit guarantee prior to the crisis that i'll do today to fill bags to be back to your pilots. the implicit guarantee became experts at terrific prices. when someone says repeal the dodd-frank and replace it, they replace it with their wallets, something about that. i'll address that a little bit further. first, the dodd-frank act is most often discussed about contacts. that's like talking about the levees in new orleans today

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without ever mentioning hurricane katrina. no one would do it. it's nonsensical. there is so little context provided about dodd-frank that you would think it is the product of immaculate conception. there is no antecedent events. it's amazing. that's why when opponents want to talk about growth rate, what was it they started with? 2010. nothing happened before that. it's inexplicable, right clicks so of course, will not often mentioned, the dodd-frank act was passed because of the 2009 financial crisis, which was the worst since the crash of 1929 and it delivered us the worst economy since the great depression of the 30s. how come it's a really mentioned? because the financial industry, lawyers, lobbyists, allies and broader influence industry has purchased has been wildly

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successful in changing the subject of the debate from the financial crisis, wall street's role in it and the cost to the country to, drumroll, the financial reform of regulations implementing it and the cost to them, the industry. it is truly remarkable how much time is spent talking about the self-serving claims about cost to the industry to the financial reform in place to prevent that very industry from crashing the financial system again. almost every mention of the costs the industry inflicted on the american people, our economy and government. better markets recently did a study showing those costs are no less than $12.8 trillion. given the economic wreckage caused from one corner of the country to the other, no one should be surprised by the number or that it's large or that it will almost certainly be literature when history looks back. there's a few copies in the back and it's also available on the

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website better markets.com. some people object to blame wall street for the financial crisis, but it cannot be fairly argued that while many may have contributed to the financial crisis, not a contributed equally in any fair minded how your rookie built, wall street wonks at the top. now let's be clear what's going on here. the richest industry in the history of the world is losing its economic power to buy bipartisan political power in using all the mechanisms of the bipartisan influence industry to bend public policy and law to its benefit regardless of consequences to others. how? first, fight to defeat the legislation and filling the loopholes and complexity. second, we see she regulatory overwhelming number thoughts of paperwork to kill or get loopholes in the rules. you wonder why the one third, one third, one third applies in the house bogus marketing documents from the famous law

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firm, that's why. if you want to know what they're really doing, read the bloomberg article, bank lobby whitens poker rules inciting for an outrage. at least that was really going on. political allies attack and harass agencies with demands and hearings while trying to defend them. sec chairman schapiro has testified xt times in less than four years. has she run an agency wenches causally dragged up to the health to be berated by industry allies? forth, repeatedly sue in the course they could not brisket. peter was wrong here. the legal onslaught 30 started. it's not coming. frist, delay, delay, hoping massive campaign contributions can purchase more political allies and will back the reform law. when they mention just one of the most lethal weapons industry is using to kill financial reform. it's what they call cost-benefit analysis, where they want to play twin regency regardless of legally claimants.

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what is said about this concept is that they're pushing its industry cost only analysis come over the the cost to industry observers will has to be rigorously and exhaustively calculated and waited and then they cry about it. peter talked about the cost of regulation. think about the cost of the financial crisis on the country. but think about this, it's not the industry worried about. it's irrational. this prioritizes through regulating industry of the benefits of protecting the public from the industry. frankly legal challenges are nothing less than the attempt to obtain the nullification of the dodd-frank law. two or three branches came together to respond to the biggest financial and economic crisis since the great depression. the third branch of government, courts or in some cases affect lingle signed the law ostensibly based on cost-benefit analysis it is one complex subject and you might've guessed we did a report on that. it's a long extensive report,

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incredibly important and you should know about it. if the copies are available available on a website for better markets.com. it's a good window into what the industry is doing here. what that is a little but talk about the dodd-frank law. i know you don't know where i'm coming out. [laughter] first come as jerry alluded to the beginning, it's impossible to evaluate at this point the law because it's so premature. the law isn't even implemented yet. the rules aren't have passed, in overnight in place, revisit a law that is not yet implemented is nonsensical. asking this question at this point in time is exactly what the multiyear industry attack is all about. their goal has been to change the focus from the collapse, the cost to everyone else to the law and regulations they have

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succeeded amazingly. the question that should be asked is why haven't the american people been protected yet, more than four years after the financial industry almost caused a second great depression it's not a perfect law. democracies don't produce perfect laws. this was the best law our democracy could produce at that point in time in the face of overwhelming industry resistance. one study at the time showed there were 2500 registered lobbyists lobbying during the dodd-frank act, almost 500 of whom were former officeholders from the hill. it's one of the most formidable armies ever assembled to battle our government. and remember the lobbyists are just the tip of the iceberg of the influence industry the austria has hired to better financial reform. frankly it's remarkable there's any thought at all. it's hard to see how anyone can

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make the case that this law went too far. most importantly, it didn't break up firms to be to fail there at the center of causing a crisis and require trillions of dollars to bail out, which this country will be paying for for decades. as one industry in the country that threatens our financial system, our economy and treasury. it's also the only industry that can destroy lives and livelihoods on a massive scale from coast to coast. yet no fundamental restructuring was required to move the threat appeared as a result of the law has provisions trying to cabin and the too big to fail firms, all of which were necessitated by not breaking them out. he you want simplicity, complexity, clarity? i got to be one-page bill. we couldn't do it. so what did we do? we have other things making up on second and third best races. the volker will is necessary because of that and it's a

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national problem. that's why there's ring fencing in the u.k. and the recent report, the hybrid of both. all these are second-guess regulatory approaches to the cleanest and easiest way to deal with the too big to fail firms, which shouldn't happen. too far? i don't think so. it didn't go far in removing compensation incentives that reward outrageous risk-taking. from 20,722,010, the year we want to start worrying about growth, wall street paid itself cumulative bonuses of $93,900,000,000. hard to see how that gets described as going too far. too far the bonuses come enough on the law. it didn't even do much to many key organizations that enable the too big to fail crowd to develop, mass-produce, sal and stick it to the entire financial system toxic securities. that's a euphemism.

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they're worthless securities viewed that cytotoxic. how did we end up with so many hundreds of billions of dollars of worthless securities and why are we here today without a single criminal conviction? that's a different story. but what did they do about key organizations? think the rating agencies. sec chairman schapiro spelled out the egregious conduct and see things in the law, but they were barely touched. too far? not far enough. i could go on but i won't. let me address one of the key arguments of the law -- the law went too far, the regulation of main street -- regulation of wall street bulk of main street, stifling growth and unemployment. no, not our profits revenue bonuses. they don't talk about that. if you do that to us camile hurt yourself. you hurt your growth, employment. the first response to that is there's nothing in dodd-frank

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that could do as much damage to this country is less financial crisis did or importantly with the next financial crisis is going to do. there is really no comparison. second, let's look at history for a moment. the financial industry of the heaviest regulation history for about 70 years after the great depression and yet our country prospered, we built the biggest, broadest, wealthiest middle class in the history of the world. american businesses across the board drive and wall street profitably ruled the world. think about it. altering the heaviest regulation of her. what happened? deregulation and non-regulation brought us to the brink of the second great depression and in just seven years or so, that's at history shows, 70 years of prosperity with heavy regulation

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and historic collapse after seven or so years of virtually no regulation. one more thing, when you said the industry whining is they won't stop doing about the cost to them of financial reform, first remember the cost of the crisis the american people, which is virtually never mentioned. it's available on our website, better markets.com. but then realized that there are really virtually no, no new costs imposed by financial reform. the real issue is who pays those costs in one. this is the choice, the industry pays them due to regulations designed to prevent crisis failure and bailouts or society and taxpayers pay them, cleaning up the mess the industry creates after massive failures and bailouts. those are the real choices.

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this industry is being re-regulated and the cost of the regulation are shifted back to them from society. now i'm going to close with a slight plug. as i mentioned better markets is a nonprofit organization. but the lonely child against great odds. you don't unpopularity contest arena. you don't get invited to swanky parties or events. i don't want to exclude this is not being swanky, art. you also don't get rich, but she do get to work an interesting, consequential and historic events. my plug, were looking for people with a lot of experience. we don't do on the job training a better markets. if you've got a lot of experience in a passion for public service, send me your resume. we need the help. thank you very much. [applause]

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>> all just move over here so i can see the audience a little better. thank you so much for those fantastic presentations. with our few minutes remaining, we might take some questions. maybe i'll start out with a question for all the panelists and we can take audience questions. but like to close with a minute or two of predictions. so obviously about a different and interesting views. but this kind of one common theme may be, may be. there was a recent article quoting karen peach or shaw, a well-known yankee analyst who had done an assessment to the regulatory landscape and she said something to the effect that the result of numerous agencies pumping out was to meet statutory bedlam will be contradictory mandates tough to enforce impossible to comply

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with. regulators need to go back to congress and said we want to do everything he set out once, but we can't hear our priorities. so for all of our panelists, along those lines, some think dodd-frank is too far, some think not enough. i'm not sure anybody said it was ready. audience they have other views. what should be the priorities under the dodd-frank a fico on the theory that it's a 2000 page miss a that is still so hard of a law or set of us to implement it is taking literally years for regulators to do that. if i could start with scott and work down the line, what should be the priorities under dodd-frank interview? >> the way we approach is a mentioned earlier, to refocus supervision beyond safety and soundness to financial stability is the sum and we look at an

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think about in our daily supervision. so we've reorganize or supervisory approach. we begun to focus on the key part of regulation we think most import. capital is important, risk management and then we done the best we can to fill in the agenda beyond that the congress has set. the priority has been improvements in supervision and capital. >> i would agree with scott's points, but for us the interplay between title i and title ii an ending too big to fail through the hate in supervision to address the issue on the front end as well as through title ii to make sure we don't have a situation in the future where we have to bail out the large institutions that feel like they have a go. >> peter. >> my view has always been a

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financial crisis was caused by government housing policy, which was not addressed at all in dodd-frank. obviously it's ureter for repealing because in my view is it's legitimate and ascent but it address the causes of the financial crisis. it is a washington idea, which was to give more power to washington and the regulatory agencies, which are always successful if they hadn't been deregulated suddenly. so my suggestion would be that we eliminate dodd-frank and go back to what the government housing policy and why we got into a situation where we had so many weak and sub prime mortgages in our financial and in 2008. >> dennis, may god give you the option of answering my question in responding to peter's answers. >> well, i'll do both, but

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shortly. one of the things we learned as there's no single bullet to protect the american people from an industry that tends to recklessness on investments and trading would not be watched. you know, dawson if i got in a candy store, nobody in their committee which you might, but pick one can be a come back out. won't happen. the incentives are so extreme on the upside and so small and the downside. what we need are layers of protection. guessers redundancies, just in a building like this. ..

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standards and resolution plans all the way to fdic at the other end to bringing light to the otc market and bringing transparency. there's a variety of things that need to be done and there are multiple things that need to be done, because it's only that way that indeed the american people will be frequented. one last thing, jerry, importantly on the study you quoted, it was -- they were hired by stiff ma. the number one maybe not the number one, one of the top five industry trade groups and one of the most powerful, and plaintiff suing today the rules actually commission that study. so when you -- when you are out there read or hear about a study saying it should go back to congress and what do you want to us do to. i think congress gave you a

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rough hint what they want to you to do. the dodd-frank act, sedly, you have to look at who is saying we should do something. most of them are directly or indirectly on the payroll of the wall street. >> okay. do we have any audience questions. if not, i'm prepared to plunge on. maybe we can start to the left here. >> not ending too big to fail. when [inaudible] asked what he would do in too big to fail at the conference last week he said possibly alternative bankruptcy procedures, or bailout. petered, would you agree those -- too big to fail and richard scott do you think there are other more kind of stricter

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string again criteria that would improve upon? >> well, my point of view, i don't see that the current structure title ii ends the essential problem and the essential problem is when all of the financial institutions are thought to be unstable or possibly even insole vent. the failure of one institution causes a panic. we have had panic seldom in the country. up with that maybe 80 years or 100 years since the panic of 1970. these are rare 0 events they occurred as i said before because of what the housing policy had done. it doesn't matter whether we have a title ii or whether we use the bankruptcy system. the advantage of the bankruptcy system is that it does not create moral hazard. it does not give creditors the notion they are going to be better treated with the failure of a large institution rather than a small one.

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so yes, i think we can do things in our bankruptcy system that cure some of the problems that are endemic in financial institutions. we don't need a title ii in order to address those issues. >> peter accidentally agreed with me on something. he said panics panics are seldom in the country. they are very rare. he referred to the 19 00s. fanal panic are common in history until one of the panics became what we refer to at the great depression. we put in place massive regulation multiple players and since then peter is right. we haven't had the panic. seventy years or so of relatively stable, not perfect, not without crisis, nothing compareed to the the great depression. he's right. they are rare.

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you want them back every ten or fifteen years or so get rid offed to frank and pretended like they'll self-regulate. the narrow question we critd sties both candidates on financial reform among few other things. bankruptcy alone we know will not work. we know for a fact it won't work. leeman brothers is the poster child. we're not taking the position that dodd-frank is perfect. it's imperfect. but no matter what you get it's going to be imperfect. do you get a law that's comprehensive enough with sufficient tools across the array of issues and sector market to the regulating banking system you have a array of tools that put you in a position reduce or eliminate crisis fail and baitout. scott alluded to the fic has been gich the stool. let the agency get the tools in

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place. learn from them and work with them. fix things when people come together at the appropriate time in. >> peter did raise his hand to a brief rebuttal. >> if i may. [laughter] >> go for it. >> that's right. and my recollection of deregulation i remember -- [inaudible] which came after the collapse of the s and l industry and when it was passed congress and others said we have a bar that is so stuff it's going to prevent any of the huge banking failures we had in the past such as the s and l crisis. i don't remember anything that is deregulatory. i'm sorry sure if we have more time to debate it, dennis would say, well, the class stegall act. when you think of that. if you know what it actually did, you would realize that it was completel irrelevant to the

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crisis. >> okay. i think we're pretty close to the end of our time. if i can run right down the row fairly quickly for predictions. famous baseball player and philosophy yo gi once said it's difficult make prediction because the future hasn't happened yet. prediction do you think the congress will undertake changes to the dodd-frank act in the lame duck session on congress' next year. maybe we can start with you, dennis. >> i think it depends on the outcome of the election if it's roughly a status quo. the senate stays roughly the way it is inspect and the house stays respect -- republican i think substantive changes are not likely. i think they'll be repeated daily attempts what called technical amendments and fixes which is going to be the to january horse through which the industry is going to try to roll back most of this.

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>> i grow with -- agree with that. we do agree. we will have much slower growth in the future as a result of it. [laughter] and that's what i'm afraid we're going to have to be looking forward to if we have the so-called status quo election. >> i don't think will be major changes. the law is still too new to be implemented and we like to say, you know, in the bankruptcy option. we tried that with the situation and we saw what happened there. it caused a risk what dodd-frank does with the lickization -- it -- thoughtful and hopefully active way that actually results

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good result for the financial system. >> i agree with that assessment and what will happen next year. it will mean that the regulatory agency will continue to work to try to make this workable. try to balance out the cost and the benefits. but i do think that over time maybe two or three years from now we'll take a relook and there will be some changes to fix either things the agency do wrong or gaps that emerge as we start putting this all together. >> well, thanks so much, once again to gw law school and professors. and i want to see if we can give a big round of applause. [applause] tomorrow on washington

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journal we'll talk about the presidential campaign and the field offices. organizers and volunteers in states across the country. mollyball with the atlantic is our guest. then a look at the battle ground state of north carolina. and it's the role in the shaping of the outcome of the presidential election. our first guest is rob christson chief political reporter. then we'll hear from the chair of the county political parties, and what they doing in the state. first the chair of the county democratic party. followed by chairman of the republican party gideon moore. washington journal with your calls, tweets and e-mails live at 7:eastern on c-span.

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inside the house of representatives. the texas book festival live this weekend on booktv. on c-span2. we're not very proficient. the dutch as well, okay during the first days of the pacific war after december 7th the japanese would occupy singapore, they would defeat -- they would occupy the philippines which is an american possession. where they receiving about 40% of their oil. they needed that oil to continue the war. okay. so they occupy these areas. and by the same token, the

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american and the philippines were not only defeated by the japanese but in many ways hue mailuated by the japan nose. this is a -- death march. 76,000 prisoners, it says. about 11,000 of them were americans. 7,000 of them would die in this 6070 miles per hour march they were forced on. and the way they were treated was nothing less than brutal. it wasn't war atrocity story. it was the real thing. the japanese beheaded many of them. pushed many of them in the way of oncoming tank. many of the american soldiers and of course the filipinos who were joining them died of starvation. this was war in the worst form. the americans won't forget that.

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they return the favor. >> this weekend on lectures in history world world war ii with the professor gary. saturday night at 8:00 and midnight eastern on c-span 3 american history tv. now the final panel on implementation of the financial regulatory law known as the dodd-frank act. they talk about when and what would cause the next financial crisis. and markets in europe and japan. it's just over an hour. >> i hope the discussion will be stimulating and exciting as the last panel. each of the panelists will speak for about ten minutes and we'll have an opportunity for colloquy among the panelist and open up to questions for the audiences. we'll go from the following order. ann pinedo will be second, simon

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third, and karen forth. please kick us off. >> thank you. it's an honor to be here. ly not fry to put you in a glomy mood. it you're going to discuss the business of trying to predict the next financial crisis, i think it's important to discuss the changing nature of these cry cease. thirty years ago we have what we call the traditional type of crisis only happen in emerging market, and the contain was regional. latin america got hit. your financial eggs in southeast asia were relatively safe. in late 1995, 1994 early 1995, the world as we knew it

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changed. mexico crashed and something strange happened within three days market in how long hong kong, india and poll land crashed. we didn't expect it. we didn't understand what what was in place that was causing world emerging markets to crash because mexico crashed. when economist can't understand something, we give it an special name. we call it an anomaly. [laughter] when asia crashed we truly understand that something was different because it drags down every emerging market in the world. and hence the nasty animal that was in the system, we call it fear now, if one emerging market gets hit, money was pulling out of every single emerging market blindless of the reason of the initial crash. at the junctionture most developed countries markets were real relatively safe.

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it was short lived. as you know, late 2007 we crashed. and we infected the entire world. this was a domestic crash beginning in the housing market that spread to the derivative market and so on. because of financial trade and remittance mechanism, the entire world was impacted by this. but this crash brought to light this other transmittal mechanism that no one wants to talk about. it's difficult to control and racial policy measures don't seem to work on it in the short term. the transition mechanism is about confidence or in other words tran mitt tal mechanism of fear. it's prevalent in the market we see it. the development of global contain nation of confidence is partially responsible for why a tiny little country like greece can slow down chinese growth and stall u.s. recovery. so predicting the next potential

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crisis is not that difficult. we know the most imminent danger is coming from the eurozone. what is difficult is what happened after the eurozone. the prediction of the next crisis is difficult. it won't look anything like the previous crisis. legislation or no legislation, it will probably blind side us from an arena we're not expecting. let me talk about europe for a minute. it really is no longer about greece. greece is pretty much irrelevant today. it the germans have calculated the cost of greek exit. it's more if they stay in roughly four basis points if they stay in. they are keeping them in. really it's all about italy today. that's what the game is. we only hear about spain in the markets right now and in the news because there's a pending need of a bailout, we now call it a loin of credit with con

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decisions attached. [laughter] -- conditions attached. [laughter] we know it. we worry about spain because of what happened to spain may thoop italy. for example, if you look at the three-year bonds of italy and spain, they literally work in tandem. we are little bit afraid if we let spain go, it might spill over to italian shores. if the market seriously lose fate in italy, i think we have dark days ahead of us. but let me talk about right now, because something has shifted and i'll talk about eight months from now. until recently, the eurozone croi crisis has been dramatic in the impact on markets everywhere. there's been a heavy black cloud of risk hanging over wall street for almost two years. and a very big shadow, dark shadow, over global markets. there is a sense right now, it's very, very recent that some of the dramatic bad cloud

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receding. it's for a number of reasons. partly because the european central bank has managed to calm the nerve of the market and perhaps rethink this time it is truly difficult. there's a profound shift in europe and especially germany, and the odds are we might have some abalance coming down the road. what we are see is the european, i'm talking about the germans have finally understood while austerity measures are critical in the short run, doing too much of them without balancing this will yield no growth in the short run, that's ginting of the end. it they have to ease off a little bit on that. more importantly what they're understanding is actual crisis management. it's happening. the european central governor is delivering what his commitment of unlimited aitalian and spanish bond buying. it's working. it's calming the market.

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secondly, the europeans are embarking full steam ahead and commitmenting to a single -- 2014 starting with the banks that are receiving state aid, and then larger across more institutions. most of the day-to-day oversight will be managed on a national level. but what you are seeing is effectively a banking union being created. i tell you what's more important is what the underlying premise of the banking union is. it opens the way for the eurozone bailout to inject capital directly in to trouble banks by passing the host government debt. that's one of the critical factors here. it allows the european central bank to behave like a real central bank. it probably will have direct access to the bailout. what this means is it breaks the vish cycle between sovereigns

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and bank. that's what the market was looking for. this is why the plan is so important to the market. i would stay one caveat here. we have a long road to go. for example, the germ man -- german want more control over the national budget. the banking -- they want to keep out of the system a bit. the germans will not agree to my plan that will mean that rich countries are underwriting banks of poor countries. it's off the table in more ways than one. we're seeing a sense that the drama of the eurozone is receding a little bit. the real question today is has it receded temporarily or is it permanently gone? i don't think we can answer that honestly until eight months from now. and that is when the italians go to election.

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that i think will be the marker, so if we look down the ready, i really do think that the greatest risk for the drama to come back is what happens with italy. we really don't want a liquidity problem to turn in to a solve sei problem. that will be the end. losing the prime minister or hoping there will be no coelection when the election happen and mario will be called back in to make a government. that was a fantastic outcome, but i'm a little bit afraid that if we rest the recovery of the rest of the world just on that, we are on shaky ground a little bit here. while fears are calming in europe today, i think there is risk in the system. and that will play itself out. there a couple of things i'll mention briefly. many of the banks hungry, poland, romania, bull gear ya, are incrediblingly exposed to

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european banks. they 90% of the credit -- i'm happy for this the breather from the european dpra ma, i'm holding my breath until next may. i think that's the marker if it's bedded down or not. not to end this on a gloomy note. i'm cautiously optimistic. [laughter] [applause] >> i think anna is going to take us back to tight vii and give it a international perspective on where we are and where the problems might still lurk in that area. first off, i thank you very much for inviting me to

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participate. i'm pleased to be here. and to have the opportunity to listen to interesting viewpoints. i'm one of the horrible, horrible lawyers that work with the international bank. that's my disclaimer at the start. and i come to this though with a fairly open mind in terms of assessing the challenges that lay ahead as far as dodd-frank implementation and implementation of the regulatory reforms related to derivative globally. to the begin with perhaps a couple of themes that sharia sharia pointed us too. it's dpiflt in a field like derivative to ignore the interconnectiveness of things and the interconnectedness of

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markets. perhaps more so than with other asset classes. you're usually dealing with multiple jurisdictions. you're dealing with one or more counter party to themselves or organized in a particular jurisdiction, however, they may act through other entities and may book their derivative through a central booking facility which may be located in yet another jurisdiction, and those transactions may be guaranteed by other parties whether affiliates or parents, that are do mill siled in another jurisdiction. it was, i think, pretty broadly acknowledged that derivety played some role. i would hardly say that they were a cause of the financial

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crisis. but if one acknowledges that they played some role, it's clear that some changes were needed in terms of the regulation of the derivative market. ic there was broad spread consensus among the g30-- 20 regarding the overall derivative reform. we had to increase or take actions that were designed to promote further transparency of what we widely perceive as being a opaque market. that we needed to ensure that the -- that there was integrity to the derivative market and that this was done by providing for reporting by providing for enhanced recordkeeping, by providing for enhanced super vision of the various parties in

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the market. and finally, we had to reduce sis systemic risk. those are the starting principle, the baseline from that it's difficult then to test and to assess where we are and how title vii and how our counter part in europe with amere really the two crucial pieces of reform that address derivative in the european market. how we fared and how far we've come. one of the principle concerns that clients have that is instead of creating a system, a regulatory system that has clarity and provides for legal

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certainty, the implementation and the rulemaking related to title vii has provided anything but the level of coincidence that market participates need. one of the earlier speakers made reference to the cftc acted expee expeditiously in perhaps having taken the lead in being far ahead than other agency in the united states in term of the rulemaking. that's certainly true, the cftc has been very active in rulemaking related to title vii and in the implementation related to title vii. the fcc has lacked behind a little bit. it's important to remember that in the united states, we continued even with dodd-frank to preserve the due alty of having derivety being regulated.

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which create the possibility for legal uncertainty and ambiguity which we have seen with the proposed and final rules. the cftc took a particular attack in implementing title vii. over the last few years, we've been barraged with proposed rulemaking without there being a comprehensive plan or comprehensive look at what the new regulatory structure would be what the new rule of the road would be. they had to comment individually on various pieces of the puzzling without seeing a whole puzzle. as we begin -- as we started to see final rule and have many, many final rules receipting to title vii we realize as pack --

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are constantly pointing out there are numerous issues where the rules that have been finalized don't actually work together. and where there are significant gaps created, and where there is significant ambiguity. like wise, we are facing deadlines, for example, october 12, was a significant deadline for most in the derivative business. however, shortly before that deadline, literally at the 11th hour on october 11th regulators decided that wisely that market participants weren't ready. there was a lack of clarity and that would permit the market to function effectively. the cftc to had step in with letters and interpret tiff guidance and so. to ho do that on october 11th and throughout the day on october 12th and well in to the evening on october 12th

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obviously poses real issues for market participants who are structure their business in compliance with dodd-frank. perhaps the most serious issue in the area of greatest risk is to go back to my first theme on interrelateness and interconnectedness. our scheme for regulating derivatives differs in some significant respect from the scheme that's being adopted in europe. while there is certainly points of commonality, for example, clearing and the clearing requirement, the environment -- requirement that most be cleared through a central counter party that's certainly common common notions about margin which is obviously incredibly important to avoiding and containing risk has yet to be rules have yet to be finalized domestically or

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internationally. generally consensus on uncleared, there's a complete lack of parallelism in many of the most crucial rules. our definitions of instruments that come under title vii regulation swaps and security base the swaps differ in and sometimes and significant ways from those instruments that are covered under the european regime. in the united states, our title vii requires that market participants swap dealer, major swap participants and vairnlgty of host of other new players submit to a registration and oversight process. that's a coordinated and national process. what we're looking at across the atlantic, is that in large measure do market participates don't have any new registration

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obligation and entity like central clearing facility are going to be regulated by national regulators. there won't even be a consensus or a coherent approach nationally. more over, the extraterritoriality of our tight vii has been -- has made the united states a bit of praia in the sense we have abandoned all notions historic notions of national -- of differing to and respecting foreign authorities and instead have decided to impose title vii for broadly to foreign banks and entities that have relatively little nexus to the united states. like wise, there are some extraterritorial scope. none of this has been racialized. basically what i'm telling you is terrorist no harmization

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whatsoever at this point between the u.s. regular regulatory architecture for derivative and the regulatory architecture in europe. we even have different timing. if we're to believe that current -- the current schedule will fall in to place, entities in the united states will start registering in late december or january, and we'll start clearing at least the first series of swaps in about sometime in about march. it's not at all clear when the framework that requires clearing in europe will take effect. so as i follow this, more sufficiently concerning even you look outside of title vii and to certain elements of rules that amay to u.s. dodd-frank

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encourages central clearing. it penalizes banks from using central clearing through limit station on their exposure to certain counter parties without excluding cctv from those limitations. that's only one of quite a number of important little id owe sink sei within the law and regulation that's, implemented. maybe to finish off, all of this emphasis on transparent sei, and risk med gracious has boiled down to the conclusion that -- instead of having individual

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participates in the derivative market face one another, and conduct their own credit evaluation and rely on their of course dealing over years rely on netting netting that proved effectively for decades instead they should rely on a central entity. a central clearing entity. which needn't necessarily be a bank. again, it makes you scratch your head, if you wanted to make sure that you are losing important financial transaction away from the shadow banking system, it's odd that you would concentrate derivative risk with central clearing entity that needn't necessarily be banks. finally, there's no architecture or structure for resolving an entity.

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any financial entity, a bank, and exchange relies and depends greatly on confidence. it's not unheard of that central clearing have defaulted. they faced defaults in the past, has faced a failure of members. a lot of that people try and dispel and say that port ability and you can easily move transsanctions to a different entity, a different central clearing entity. well, the technology of that is not really well understood at all. and it's hard to have confidence in that. but more over, it's not clear that without some kind of government sponsorship or government backed access to liquidity. they will have the confidence to

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avoid essentially what would be a run. while dodd-frank actually provides for some support to central clearing entities, which, by the way, seems to go mostly unnoticed by critics who say we have eliminated government support, have eliminated taxpayer support, we eliminated the possibility of too big to fail. we have a provision that permits intervention to help in a modest way financial utilities like central clearing facility. however, that's not universal. there's no provision made in europe to support whether directly or indirectly any central clearing facility. so in my mind, we have created a series of risks within the derivative area that were nonexistent before we began the enterprise one the regulatory confusion, the am beau giewgty, the lack of legal certainty.

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two the misalignment and the lack of harmization here in the united states and those in europe for a market that is we have created a host of technology issues. and it seems a bit like human -- when we're seeing it faced with market glitch in the capital market and the equity market not to expect and not to anticipate that when we move so much to centrally cleared facilities to -- without clear rules we shouldn't anticipate some technology issues. and finally, that we have consolidated risk or will be soon consolidating risk in the new entity that without necessarily having a support mechanism to mitigate the possibility of and without having real clarity or

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discussion about the merits of a resolution framework or a wind down mechanism for central clearing when we have essentialed placed all of our eggs in one basket. [applause] >> simon? welcome back, by the way. >> thank you. i'm simon johnson. thank you for inviting me and organizing another great conference. what can cause the next financial crisis? i have three things to say. first of all, i don't know. [laughter] and you don't know, and nobody knows. i worked on financial crisis for twenty five years, i was 2007 through over 2008 the chief economist of the international monetary fund, just down the

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street. i attended a lot of very interesting meetings during that time period with top officials and private sector people. poem who know as much as can be known about the world's economy and the world's financial system, they collectively and individually had no idea what was happening and what was going to happen in september 2008. the second thing i would say is look around the world. the european situation you heard of a nice summary just now, i'm much less saying about the political risk and the economic risk. i think ultimately italy will have to restructure the sovereign debt as 2 trillion euro in the outstanding debt. and the consequences are uneffectively knowable. i wouldn't worry about you were.

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i would worry about japan. i wrote an article that appeared in the "atlantic." saying that japan may be the financial crisis. we talked about japanese dynamic and japanese fiscal policy and the way it can impact the world economy and the japanese economy. when i say when we wrote the article it was met with a stone any silence. i'm not sure if you kept track of the imf and the interest rate risk held by large japanese financial constitution. if not, read the front page of the "financial times" today. i wouldn't worry about europe an japan. i would worry about china and the chinese economy and exactly

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the forms of unforseen con they gone that we have experienced again and again since the mid 1990s. and that brings me to my main point which is what i don't know with the sharks will come from. where the problems will merge around the world. i do know one thing. we are not ready. our financial system is not ready we have not gone far enough with financial reform. i endorse to support everything that dennis keller said on the previous panel in that regard. and let me put it to you like this, jpmorgan chase is a largest bank in the united states. it has a balance sheet of about $2.2 trillion under us gpa.

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when you see a lot of the compare sop of bank size around the world, people say, jpmorgan state is between number six and ten globally in terms of assets. all of those comparisons are wrong. they compare u.s. banks under u.s. gap with international banks who's balance sheets are measured under ifrs. now there is a fundamentally different treatment of derivety. you might like u.s. gap you might like ifrs. question have that discussion from a standpoint from the regulatory risk standpoint i like and a lot of my former colleague like ifrs. it's aless generous form of netting. has a better indication of the downside losses you may be

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facing as a taxpayer. if you coniferred, jpmorgan chase balance sheeted it's not $2.2 trillion. it's $3.9 trillion by estimate make. it is by far the largest bank in the world. sorry, it's larger than the european bank. the only other bank that is close in terms of total size is bank of america. now this is $16 trillion economy, roughly speaking jpmorgan chase let's call it $4 trillion balance sheet. let me ask you a straightforward question, if jpmorgan chase were to fail or on the brink of failure today, a friday, would they be allowed to collapse like lee man brothers over the weekend? this is hypothetical, just to be

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clear. [laughter] i don't want to be the cause of the next crisis. could jpmorgan fail be allowed to collapse? anybody want to raise their hand. could they fail? i see no hands. could jpmorgan be taken over and managed through lickization in an orderly fashion without causing disruption around the world using title ii a new reservation authority liquidization authority offed dodd-frank. would that happen? could it impose losses on creditors to jpmorgan chase that that is the essence of liquid ization without massively derivety market and other financial market not just in the united states but around the world? let me make this question a little bit easy your for you by

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telling you that there is no cross-border resolution authority. it's not legislateed inned to frank. it's not agreed among the g20 on the g7. the imf has been telling the europeans for twenty years they need a cross board resolution authority within the europe and eurozone they don't have. governments wouldn't agree to it. if you had a cross-border agreement on how to handled resolution, asset, and liability with the french, you think they would follow it in a crisis? [laughter] [laughter] cross-border resolution of global mega banks is a physical, legal, economic, and political impossibility. you will not see it in your professional life times, and i

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doubt your children will see it. i stand with tom formally the kansas fed and now the fdic with sheila, former head of the fdic. you must read your her book and with richard fisher, and harvey rosen bloom of the dallas fed. mr. fisher says very clearly that our largest banks have become too complex to manage. they cannot be managed by the management, site -- see barkly for a different illustration. they cannot be managed by the shareholder. we can talk about hsbc and money-laundering. we cannot be managed or understood by the creditors. we have any number of failures across the european big bank to look out for that. they cannot be managed by the

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regulators. the largest banks in the world and in the united states should be made smaller. smaller enough and and simple enough to fail. no funding advantage. these -- there is not a market. there is nothing about the market in the structure. it is a vast nontransparent dangerous government subsidize scheme. you, the american taxpayer, directly indirectly through the federal reserve stand behind the balance sheet and the risk of jpmorgan chase whether you like it or not. this encourages them to get bigger. this encourages them to take more risk. they get the upside, the downside is someone else's problem. in a world with these uncertainty, in the world with the mark economic risks, in a

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world with so little capital in financial institutions, including in leading american based global mega banks. in this world, where the sharks will come at you, unforeseen, from all kind of places, you could not have imagined. you must build a resilient financial system. that is what the economy needs, that is what the nonfinancial sector needs. you can listen to the lobbyist and the special interest, and they will complain about the profits, and they will complaint about the efficiency of the american economy, and they will threaten perhaps gently, consequences from american economic growth. all of that is an illusion.

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all that have is an distractions. the real danger to the american economy in this context, is at our largest banks will become big, they will take on a great deal of risk, and they will blow themselves up. enand the cost of that whether or not they will rescue them or use different terminology, the cost of that. the cost last time were estimate bid dennis about the market the $12.8 at least $12.8 trillion. used with the gdp. next time it could be worse inspect next time the losses could be greater. next time the damage to all of us, to all american citizens, to our place in the world, could be greater. thank you very much.

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[applause] [applause] karen, do you have any good news to give us? [laughter] i guess i'll start by saying my dog is so comfortable i'm going it stay here. these are some of what i'm going to say before. -- he's heard some of what i'm going say before. i think he sides more with simon. [laughter] actually, i do in a number of ways that probably will surprise him and dennis and others. and the first thing on which i agree with you simon is that i also do not know what the next systemic crisis will be. and i'm as fright end as you of it. so what think about the next systemic crisis might be, i think the best place to start is what caused the last ones and not going to fight when we had panic in 07 or 1933. we heard it from the first panel. i'm go back the last twenty

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years we've had most recently. the first one in 1994, as you mentioned, mexico. and that was a solvently crisis. we feared that a country would go bust, ie, the credit was no good. that would ripple with dangerous effect for the banking system. that got handled, we aside from now how and puttered along to 1998 when russia and indonesia posed solvent sei risk in the financial system. we managed that and puttered along. this time no so the so long. we hit 1999, and hedge fund called long-term capital management blew posing what anna described, complexity risk. raising the perspective of a shadow institution unregulated by the banking agency would have caused so much damage to the banking sector that the federal reserve very inappropriately rushed in the package of the

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assistance from the banking sector to support the hedge fund. we puttered some more. this time two years to 2001. we had one of the most frightening case of sis timmic risk when the world trade tower came down. at that point because where the terrorist struck, they meant to hit the financial system, we came very close to a shut down of the global payment system. not a small issue because all of was pretty much buried under the tower and it blew. the fed rushed in with $87 billion at that point. more than than had ever put in before basically took over the payment system. held the world together with

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glue. no one expected this and we came out the other side. the credit crisis started with the so called west developed country one. it was starting to be thought about '99. operational risk, the kind of systems the concentration of system, the complexity and the dependent ens of the world financial market on the plumbing the infrastructure. that's operational risk. that's an important force form of systemic risk. after 2001, puttered again and we hit 2007 and 2008. it was rating agency, regulators asleep at the switch. sins of mission and comission. and he came very close to the

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bripg of another great financial crisis. fine. then 2009, we had the european crisis. it was, of course, going on before. because of the weaknesses exposed in the 2008 debacle, all of the papering over that european regulators had been doing for decades. simon alludes to that was revealed and we had the e.u. crisis. 2011 another operational risk crisis. these things happen a lot. not just the evil banker hypothesis that counts. they powerful to be assured. they live in a world of danger beyond their control. beyond the regulatory control. a what should be done about all of these causes of sis stemmatic risk.

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i think we need a balance regulatory structure. not a few simple fixes that largely rely on capital. it's very important. it doesn't cure operational risk. you can have buckets of capital, but when the light goes out, you can't find it. you can have the same bucket of capital, but in a liquidity crisis, if the capital is not readily assessable form, you can't mobilize it to support your institution. you can cut banks down in size as simon suggest. you have to answer one question, who runs the infrastructure? anna discussed the infrastructure in the derivety arena. there are many others. we need to think about that. even if you chop jp penny -- [laughter]

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jpmorgan, far more formidability in to minipieces. you have to deal with the payment pieces. and i don't know how little and itty and bitty they should be. i read the fisher paper, read many others. i see -- a lot of discussion of making banks smaller. not a lot of agreement on size or how to. the only specific proposal of which i'm aware in the policy arena is legislation by senator browne of ohio to require banks to hold more than 12% in the wholesale liability in relationship to gdp. and that's a number we need think about that. other people will have lots of other numbers as dodd-frank demonstrates the issues are imperfect. i think jerry said. this is tough. we can debate the size and the

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complexity issues we're in a dangerous world. what to do now? and i think here we need the balanced regulatory frame work i mentioned before. a few relatively simple things. but dodd-frank framework, the global regulatory arena is very complicated with a lot of unintended cross cuts effects that think about as bumper cars. the study that discussed that my firm put out were discussed in the earlier panel try to take it on by looking at the array of major financial rules, mapping them out for both their key provisions intended effect and unintended effects. we don't say all of these intended we map them out to see how each of the rules fits together if there is a coherent framework. deb nice commented that the